BOJ’s missteps to devalue yen to levels that will ultimately force a regime change

BOJ’s battle to keep long term rates suppressed has kept us fairly focused on our own market as we think we might be at a cusp of a Japanese currency turmoil that should eventually bring about a major monetary policy regime change at Japan’s central bank that could cost its chief his job. BOJ bought nearly ¥3trn of JGBs last week while expanding its purchases beyond 10-year maturities, sending a clear message that Kuroda-san will not tolerate higher yields above the bank’s targeted ceilings. 

As we underlined in our February 14th weekly publication when BOJ’s special bond buying operation was first announced, we think this will prove a major policy error as it will only encourage more yen selling in the short term while enticing macro funds to short JGBs for the medium term, selling into these interventions, betting that Japan’s central bank cannot continue to fight global market forces that are leading long term rates higher everywhere else. Ultimately, we think there will be a big payday for JGB shorts once BOJ throws in the towel or raise its targeted yield ceilings. 

Also talks of Kuroda wanting to protect his 10-year legacy ahead of his term-end in April of next year, by staying on the same ultra-loose policy course is equally worrying. Indeed, his recent statements are sounding increasingly like fabricated propaganda, like pointing out that the yen is not weak and it is the dollar that is strong (which has since been thoroughly refuted given yen’s plunge against all other units) while recently stating that there is no direct link between long bond yields and the currency market, an explanation which beggar’s belief. 

Talks of MOF pondering intervening in the forex market to try to strengthen the yen and to counteract the effects of BOJ’s intervention in the JGB market underlines what we have described as a major conflict of policies brewing between Japan’s central bank and its finance ministry. For now, it seems BOJ is likely to continue to fight on this losing battle of trying to suppress long bond yields, leaving the ¥$ rate on course to surpass 125 level by month-end end, possibly nearer to 130.

With weaker yen adding more inflationary pressures through higher import prices and rising household costs, we think the central bank will eventually be forced to allow long term rates to rise to break this vicious cycle. Question now is how much the yen has to fall in value against the dollar to force a BOJ policy change which could mark a historic bottom for the Japanese currency (as it looks hugely undervalued) and should also lead to a notable outperformance of Japan’s financial stocks.